What Is Long-Term Disability Insurance and When Do You Need It?

If you're like most Americans, you rely on your employment income to cover living expenses. Have you ever considered what you'd do if an illness or accident left you unable to work for months or years? When you don't have adequate savings, disability insurance is one way to provide financial stability and peace of mind. As you plan for the future, it's helpful to learn what long-term disability insurance is and how it can benefit you.

What Is Long-Term Disability Insurance?

Long-term disability insurance is a policy that helps provide for you financially in case you're unable to work for an extended period of time. Usually, this type of insurance kicks in after you're disabled by an illness, accident or injury. 

What Conditions Are Covered Under Long-Term Disability Insurance?

Every insurance company can determine what qualifies as a disability for the purposes of long-term disability insurance. You can find covered conditions in your plan documents — read them carefully before you purchase.

Insurance providers view a disability as a condition that prevents you from doing your job. This may happen if you're injured or incapacitated. Policies may also cover debilitating illnesses, such as cancer, Crohn's disease, degenerative disc disease or multiple sclerosis. Disabilities don't have to be permanent to qualify for benefits.

Benefits of Long-Term Disability Insurance

The specific benefits of long-term disability insurance vary by plan and provider. When you make a claim for a covered condition, your policy typically pays you each month. This money replaces part of your income, so you can afford to pay for living expenses.

How much you receive each month depends on the terms of the contract. In most cases, you can decide the amount when you purchase the policy. Many providers offer up to 60% of your income. Maximum payouts may also be limited by your industry or occupation.

When you buy your own policy, you don't usually need to pay taxes on the benefits. However, if your employer covers the premiums, you may need to pay income tax on the payouts you receive.

Waiting Period for Long-Term Disability Insurance Benefits

Most long-term disability policies come with a waiting period, which is also called an elimination period. During this time — typically, 1 to 3 months — you won't receive benefits. If you're still unable to work due to a covered condition after the waiting period ends, the company starts sending money every month. Keep in mind that every policy has different terms, so the length of the elimination period may vary.

How Long Do Long-Term Disability Benefits Last?

A long-term disability policy comes with a benefit period, which is the maximum amount of time you can collect benefits. The provider discloses this period before you sign. Some policies enable you to choose the benefit period; longer benefit periods often come with higher monthly premiums.

Available benefit periods can vary dramatically from provider to provider. Five years is typically the shortest option. The longest benefit periods can last until you retire. Some providers also offer insurance riders that can extend the benefit period for an additional monthly fee.

For most policies, your benefits stop when you're able to return to work.

Your benefits may be affected by the nature of the disability. If your condition renders you unable to perform any job, financial support usually continues for the length of the benefit period. However, if you're able to perform a different job, the provider may require you to seek other employment. Your claims manager may even help you find and train for a suitable position.

Filing a Long-Term Disability Claim

When an injury or illness prevents you from working, it's important to document the situation and see a doctor as soon as possible. This establishes a paper trail that the insurance company can use to verify your condition.

As soon as you have a diagnosis from a doctor, you can file a claim with your insurance provider. Read the instructions carefully to find out what proof the company requires. You may need a letter or form from the doctor, test results and confirmation from your employer. Most companies limit the amount of time you have to file the claim; check your policy for details.

After the provider approves your claim, you'll go through the waiting period. It may start from the date you were disabled or the date you filed the claim. When the time is up, you'll start receiving a payment every month.

Your claims manager keeps track of your progress throughout the benefit period. If you get well enough to go back to work, they'll help you navigate the process.

Is Social Security an Alternative to Long-Term Disability Insurance?

If you've been working and paying taxes, you may be eligible to receive disability benefits through the Social Security Disability Insurance program. This government-run program pays you every month if you're disabled and unable to work for at least a year. You'll receive benefits until you can go back to work.

Social Security disability benefits can help you in case you're unable to work, but the amount might not be enough to cover all your expenses. In addition, you must meet the Social Security work credit requirements to qualify. For that reason, many people need a combination of Social Security benefits and a long-term disability policy to stay financially sound.

Then, there's the issue of the disability itself. The government may use more stringent guidelines than insurance providers to determine if your disability qualifies for benefits. You'll also need to prove your condition is severe enough to prevent you from working for at least 12 months. If you're able to perform other work, the government will also deny disability benefits. Long-term disability insurance policies, on the other hand, may only require a waiting period of 30 days — and you can receive benefits even if you're only out of work for a few months.

How Do You Know if You Need Long-Term Disability Insurance?

Most people can benefit from long-term disability insurance. It's particularly helpful if you have limited savings and investments; the monthly benefits make it easier to pay for your home, car and essentials for living. Disability benefits defray costs, so you don't have to withdraw money from retirement accounts.

If your employer offers long-term disability insurance, it doesn't mean you're in the clear. These group plans may have low monthly benefits that may not provide adequate funds. When that's the case, you can supplement the coverage by purchasing an individual plan.

How To Apply for Long-Term Disability Insurance

It takes time to get long-term disability insurance. To start, get quotes from several providers; compare monthly premiums, maximum benefits, available benefit periods and covered disabilities. When you find one you like, apply for the policy. Most providers require a medical history and a medical exam. Once they're complete, you'll typically receive a decision within a few weeks.